ownership succession and growth for midcaps since 1991€¦ · ownership succession and growth for...

Ownership succession and growth for midcaps since 1991

5

Shaping the future

Germany is an attractive market for private equity investors

ever since post-war founders passed their companies on after

the country’s “economic miracle”. The German economy –

characterised by medium-sized enterprises and more than

three million family-owned companies – sees thousands of

firms repeat this transition with each generation.

It has taken some time, but entrepreneurs finally

recognise financial investors as potential partners. Provided

they are present locally, speak the language, know the cul-

ture and can offer what is needed for ownership succession.

This goes far beyond capital and financial expertise. In an

environment where money market investments and bonds

barely offer interest, capital has become a readily available

resource. It’s about shaping the future. This requires taking

a longer-term view and resourcefulness to leverage a compa-

ny’s strengths: what a firm does best offers the most potential

– through expansion abroad, capital expenditure or acquisi-

tions. Halder has been practising this approach for 25 years.

Mathias FackelmeyerPartner, Managing Director

Paul De RidderPartner, Managing Director of Halder Holding

6

The German private equity market

7

Halder’s entry to the German market is a bold step:Private equity is a barely known concept, entrepreneurs often do not understand or resist offers from interested buyers, and sponsors see little potential. Some market players are facing difficulties as a result of poor investments. In 1990, the German Private Equity and Venture Capital Association (BVK) reports € 2 billion funds under management, € 642 million of which having been raised that very year.

1991

Taken in a European context, the “DACH” region (Ger-many, Austria and Switzerland) was the third-largest region in 2015, accounting for approximately 20 % of the € 47.4 billion invested overall. This position has not changed in recent years as investment was much stronger, particularly in the United Kingdom and Ireland, but also in France and the Benelux countries.

The buy-out market – which involves the acquisition of more mature companies and represents the most impor-tant sector for Halder – shows a similar picture. In 2015, France and the Benelux countries as well as the United Kingdom and Ireland each invested about € 10 billion, while the DACH region’s buy-out investment stood at two-thirds of that level.

International investors often wonder at these ratios, as market participants tend to see Germany as one of the most interesting private equity markets in Western Europe – the world’s most attractive region for private equity out-side the United States. Why is that?

A substantial reservoirOne important factor is obvious: many private equity sponsors prefer investing in established companies with predictable cash flows and growth opportunities. More mature firms mostly reside in developed economies – first and foremost in the United States, followed by Western Europe. And there, Germany ranks highly as it has the highest economic output in the region.

This economic output is generated by more than 3.5 mil-lion companies. Besides privately held corporations, these include publicly quoted firms like Volkswagen, BMW and Continental, where a significant portion of shares is held by the founders’ families. Then, there are well-known un-listed companies entirely or largely held privately, such as Aldi, Bertelsmann, Heraeus or Dr. Oetker. These compa-nies generally are not close to private equity as they have sufficient access to financing via capital markets and the banking sector. The early 2000s were an exception to this situation as financial markets forced large companies to focus on their core activities and subsequent streamlining of corporate portfolios provided investment opportunities from spin-offs to financial investors.

What is “Mittelstand”?Most companies in Germany are much smaller. “Mittel-stand” is a mixture of SMEs ranging from sole proprietors generating less than € 100,000 in annual sales to companies with a business volume exceeding € 50 million. There are more than 10,000 midcaps with sales in the € 25–250 mil-lion range, and this is Halder’s target segment for invest-ments and add-on acquisitions.

Usually, these firms are owned by their founders or the founders’ families, and they traditionally use a mix of eq-uity capital and bank loans to finance operations. Times have changed, however: regulation in the wake of the fi-nancial crisis has made borrowing more difficult, e. g. by making lenders more selective. In addition, many SMEs

Paul De Ridder (left), Joachim Kramer who passed away in 2001 following a severe illness, and Susanne Quint establish Halder’s Frankfurt office. Previously, they had worked together at Continental Bank, which operated in Germany and had a leading position as a buy-out lender, primarily in the US.

8

Halder forms an Advisory Board to complement the German investment team’s financial expertise with opera-tional experience. It includes Hermann von Bruck, former CEO of Stinnes AG, as its Chairman and Halder founders Paul Deiters and René Smits.

Slow startSince the end of the 1980s, private equity investments are limited to small and medium-sized, enterprises and transaction levels re-main low. Following German reunification, some activity is geared towards companies from Eastern Germany held by Treuhandan-stalt, the government institution overseeing the transition from state to private ownership. The figures in the adjacent graph are in Deutsche Mark as the euro is still a decade away.

1992

were established after the war and have since been passed on to one or more generations of heirs – a growing pool of owners becoming more and more detached from the busi-ness. They often take more time to reach a decision, they are not as well informed as active entrepreneurs, and they rarely have financial resources for significant expansion.

A partner for mature companies with good prospectsThis is where Halder comes in: as a partner for strategic change, with the confidence and experience from chal-lenging growth projects already completed. And as a provider of solutions for entrepreneurs or their families ready to step back from their firms, but without internal successors.

Institut für Mittelstandsforschung in Bonn, a research organisation focusing on SMEs, has been following the development of small and medium-sized enterprises since the 1990s. A new study concludes that the number of companies to change ownership will increase in com-ing years: a result of the broadening company base as well as demographic trends – the general ageing of the Ger-man population does not stop for entrepreneurs. Every year, this affects hundreds of companies in Halder’s tar-get market – the key is finding the right ones and demon-strating the benefits of private equity.

Fertile ground for successWhile this substantial pool of companies points to ample potential for investment, actual investment will require

more than that. Looking at the bigger picture, the German economy is currently faring well internationally thanks to the innovative and competitive strength of its SMEs, a well-educated labour force, excellent infrastructure, sound public finances, and the strength of its industrial culture in the face of continuing structural change.

These conditions have given rise to a phenomenon that sets Germany apart from other industrial countries: “hidden champions”. The term refers to global market leaders – usually midcaps who generate a large share of their sales through exports while being little known in public. Prof. Hermann Simon, co-founder and chairman of strategy consultants Simon-Kucher & Partners, has followed these firms for decades. He applies three criteria: a hidden cham-pion is among the top 3 in the world in terms of market share or is number 1 on its home continent, generates annual sales of less than € 5 billion and is largely unknown to the public. Prof. Simon estimates that there are about 3,000 such companies globally, almost half of which come from Germany.

Small hidden championsIt is not just size that matters: similar concepts apply to small and medium-sized hidden champions as well. What they have in common is a deep value chain, a focus on inconspicuous but unique products, and a good competi-tive position, often in market niches. Thus, they are “con-demned” to international success, as expanding beyond their home market gives them critical mass. This forms the

The German private equity market

9

1994

Michael Wahl works in M&A at Lazard before join-ing Halder. He is appointed Managing Director in 2001.

Dr Hans-Jürgen Knauer, previously CEO of Stinnes AG and executive board member at Veba, becomes the new Chairman of the Advisory Board. Its membership grows to seven members by the end of his term in 2004; most of the new members have an industrial background.

1996

basis for Halder’s investment strategy in the German Mit-telstand: partner with (potential) hidden champions and keep them expanding by providing capital, applying best practices and supporting growth initiatives such as inter-nationalisation, capital expenditure, add-on acquisitions or changes in business strategy.

Professor Hermann Simon is chairman of strategy and market-ing consultants Simon-Kucher & Partners. He has taught business administration and marketing at German and international univer-sities, including Harvard Business School and INSEAD.

Hermann Simon:How hidden champions workGermany’s strong international economic position is based largely on the success of its world-class medium-sized en-terprises – hidden champions. They follow highly challen- ging objectives: growth and market leadership. To achieve this, hidden champions concentrate on their technologies and markets. Using a deep value chain, they create unique products and protect their know-how. Specialisation is then linked to global distribution and marketing. Globalisation is the key growth driver for these companies! Innovation and customer orientation are their greatest strengths, supported by pricing policies focusing on value, not price. They also raise entry barriers to competitors by providing added value for customers through consulting, systems integration, and ease of use. The strong competitive position of hidden cham-pions is based on these building blocks.

* Medium-sized enterprises which are either market leaders on their continent or among the top 3 in the world, yet largely unknown to the public. Source: M&A Monitor, Bundesamt für Statistik, BVK, EVCA

The most “hidden champions”

1,000

1,200

200

600

800

400

Switzerland Austria Japan GermanyUSA

1,307

366220

116110

10

Strong midcaps made stronger

11

1997

Growth acceleratesIn 1997, German private equity firms manage nearly € 7 billion in assets, of which € 2.2 billion rep-resent capital raised during the year. Interest in private equity is growing by leaps and bounds as the market becomes more mature: corporate groups start to sell off larger subsidiaries to stream-line their organisation. US-based institutions are attracted to this new quality in transactions. At the same time, Deutsche Börse takes a more active role in German corporate finance – for example, a new trading platform for small technology firms is launched in 1997 (“Neuer Markt”) – and public listings become an option for private equity exits. Attitudes towards financial investors change: from 1997, private equity companies receive € 1 billion or more in fresh capital per year. Halder turns to the stock market to exit Techem in 1999 and 1&1 in 2000.

trepreneurs and many recognise Halder as the partner of choice for ownership succession and growth.

How do more than 70 investment opportunities exam-ined by the team every year translate to two investments for the fund? While market environment and economic development provide the framework, investment deci-sions ultimately depend on the disciplined application of investment criteria to any individual case. Halder targets established firms with revenues ranging from € 25 million to € 250 million. They must have a sound management, a proven growth path, a strong competitive position as well as potential for further expansion. The ideal target is a niche operator with good potential. Halder invests in this type of company through a management buy-out, i.e. Halder and the target’s management eventually hold all or a substantial majority of a company’s shares. Mutual trust and the alignment of investor and management interests are important elements of the relationship.

To Halder and its capital providers, any investment has to provide potential for future development and increasing value, even in times when there are fewer investment op-portunities available. On average, about 20 % of the com-panies under review received an offer in recent years. The stable percentage shows the team’s close adherence to the selection criteria defined by the investment policy: Halder doesn’t buy at any price. This approach aims to balance opportunity and risk – and it works: to date, Halder has invested more than € 565 million in broadly diversified

Halder is among the longest established and most active private equity firms in Germany: its team has invested in 38 companies and 30 exits were completed since 1991. The key factor for long-term success in an economy driv-en by SMEs and manufacturing is that a private equity investor has local ties: entrepreneurs prefer investors who are close by, act as sparring partners, and help to unlock future potential.

What works for entrepreneurs applies to the buy-out mar-ket’s community as well. Halder became a part of it ear-ly on by establishing a supporting network of industry experts. Today, there are more than 50 former managers working with the investment team, either as members of the Advisory Board, as senior advisors, or representing Halder on the board of portfolio companies. Halder’s re-lationships to M&A advisors are excellent – just for the current fund Halder-GIMV Germany II, more than 1,000 meetings were organised with intermediaries mandated to sell a company or providing access to owners prepared to step back. In addition, corporate literature, mailings, a website, and events for SMEs facilitate an ongoing dia-logue with the firm’s broad contact base.

Quality countsBroad market coverage has increased deal flow, bringing Halder ever closer to its core target group: the largest share of investment opportunities is related to family-owned en-terprises, many developed directly and exclusively by the team. The team is close to small and medium-sized en-

12

20012000

Gimv acquires HalderGimv is a Belgian private equity investment group formed in 1980 and listed on the Antwerp Stock Exchange with a market cap italisation of € 1.5 billion. It acquires Halder in 2000 and by 2008, only the German team con-tinues to operate under the name “Halder”.

portfolios and incurred 7.1 % in losses while cash returned to investors so far was 220 % on exits completed.

Beyond capitalHow do sellers and investors meet? Usually, the availability of private equity as an option for owners looking to sell their company while securing its continued existence is the main factor. It also provides them with an opportunity to discharge responsibilities to employees, customers, suppli-ers, location and region without continuing entrepreneur-ial risks. More importantly, entrepreneurs prefer a solu-tion resolving succession issues and providing a growth perspective at the same time – a sustainable plan for the future.

Solid financials are the first step. On average, bank loans represented about 55 % of the purchase price of Halder’s investments. The percentage was lower in the wake of the economic and financial crisis of 2008/2009 as the use of equity and vendor loans increased. Following the initial investment, Halder often provides additional capital – de-pending on the development strategy, it may be a consider-able amount – to set up the best possible growth scenario over the holding period, which averages five years.

Best practices helpSuccessful development of midcap firms does not rely on financial engineering. Agreed at the time of investment, a strategy aiming at sustainable sales and earnings growth is implemented – this is the driving force. It is supported by

Halder’s best practises: establishing an effective supervisory board involving managers with industry and leader-ship experience makes sure corporate governance works. The board also serves as a sparring partner for the portfo-lio company’s management. A catalogue of measures and key performance indicators provide direction for the ini-tial investment stage, reporting is made more transparent, and, management is often strengthened.

Strategies for growth = strategies for more valueOnce these conditions are in place, growth strategies cre-ating value are the key to success. Usually, these are based on Halder’s original investment criteria, e. g. as successful midcaps are often driven by exports, further internation-alisation can tap more growth potential. In this context, strengthening international distribution and starting local production in target markets become important building blocks. Whenever a large step abroad is next – e. g. to the United States or China – Halder can serve as a catalyst for a bold, forward-looking decision. Halder’s work with such different companies as Geka (cosmetics packaging) and VAG (large valves and fittings for the water industry) shows just two cases in point.

Establishing an international footprint in manufactur-ing often requires significant capital expenditure as long as firms remain in the portfolio. In global sectors like the automotive industry, strongly backed medium-sized firms such as Booster Precision Components can create an in-ternational production network turning them into a key

Strong midcaps made stronger

13

Record inflow of fresh capitalWhile booming financial markets depend more and more on the “New Economy”, German private equity companies have record inflows of fresh capital in 2000 (€ 5.2 billion), taking total funds under management to € 15.6 billion. The New Economy then morphs into the dot-com bubble – which eventually bursts. The September 2001 attack on the World Trade Center in New York and the war in Iraq trigger a bear market in stocks; the economy experiences several years of weak growth. Under Halder’s tight supervision, the portfolio comes through the crisis in good shape.

2003

Halder launches its first country fund for Germany with € 155 million in capital and establishes a Super-visory Board. Dr Peter Wendt, becomes Chairman. Previously, he was head of BHF-Bank’s private equity operations and practised at White & Case as an at-torney, advising many SMEs. He was also member of Halder’s Advisory Board from 1993 to 2009.

supplier. Usually not widely known, midcaps also raise their profile in international markets by establishing local production – again adding to sales potential.

Companies can also create new opportunities by changing business strategies. For a long time, CNC specialist Hel-mut Klingel had been a contract manufacturer to a broad range of clients. Now, its business model is being tailored to the requirements of medical technology companies to leverage its manufacturing capabilities and to achieve the higher valuation levels typical for the sector.

As Halder’s investment criteria focus on companies in a strong competitive position, they often have what it takes to acquire other market participants. Here, add-ons are an obvious means to achieve growth and increase value. Even more so if they accelerate strategy implementation, improve sales and market position or take the business to a new level, as seen at Aqua Vital (water dispensers) and Prüm-Garant (interior doors).

All Halder divestments; as of 30/06/2016

Holding period to exit

more than 65 monthsless than 40 months 40 to 65 months

28%

41%

31%

14

Capital for midcap ownership succession and growth

15

ment buy-outs. While Halder’s other operations were sub-sequently folded into the group’s activities in Belgium and the Netherlands, the team based in Frankfurt continued to focus on SME buy-outs, starting to manage a German country fund in 2003. In 2013, Halder became independ-ent for the second time when the team completed its own buy-out of the German operations.

Focus on German midcapsFrom 1992 to 2000, Halder III and Halder IV marked the early years on the German market. These multi-country funds invested € 190 million overall in more than 40 port-folio companies – 14 of which in Germany, the largest sub-market for both funds, with € 32 million and € 42 mil-lion invested, respectively. From 2001 to 2002, new parent

Halder has participated in or managed five programmes for midcap investment since 1991. A total of € 565 million was invested in 38 portfolio companies, of which 35 were buy-outs. The investment programmes’ changing profiles reflect Halder’s development over the past 25 years.

Coming full circleHalder was established through a buy-out of what at the time was known as “risk capital activities” of Dutch Oran-je-Nassau Group. With multi-country funds, Halder initially established a position in its core markets Belgium, Germany and the Netherlands, followed by investments in other European countries. In 2000, the shareholders sold to Gimv, Belgium’s leading private equity investor. With-in Gimv group, Halder became the specialist for manage-

All Halder investments; as of 30/06/2016 Source: Halder

Who are the sellers?

Financial Investors

2004

Strategies to increase valueThe new fund, Halder GIMV Germany, sees a change of approach: to unlock the potential of its portfolio companies, Halder becomes more closely involved in underlying corporate issues and completes its first add-on acquisitions, strategy changes and major internationalisation steps.

Dr Wilfried Kaiser is the next Chairman of Halder’s Advisory Board. The Board is expanded to nine mem-bers with a background in industry sectors relevant to the portfolio; many are engineers.

54%

27%

19%

Family Owners

Corporate Groups

Buy & buildPrüm-Garant is formed by combining two spin-offs from larger conglomerates. Following the merger, it immediately be-comes the second-largest company on the German market for interior doors.

Benelux Germany

Volume of Halder investment programmes since 1992; Source: Halder

More capital for German investment

€ million

200

150

100

50

250

Halder III Halder IV Halder GIMV

Halder GIMV

Germany

Halder GIMV

Germany II

16

Adjust strategy and go abroadCosmetics manufacturer ADA’s strategy is being focussed on the market for hotel amenities, and non-core activities are terminated. In parallel, Halder pushes internationalisation of the company’s sales and procurement operations in Europe and Asia.

2006

Capital for midcap ownership succession and growth

Cash returned to investors from Germany reaches € 500 million (cumulative).

2008

company Gimv provided € 49 million for investment, used for the acquisition of three portfolio companies in Germa-ny and one in France.

The next fund, Halder-GIMV Germany, confirmed Halder’s approach to the German market: after a final closing at € 155 million in 2005, the fund invested in nine portfolio companies of which two were merged. Its last divestment was completed in 2013. According to Preqin, Halder-GIMV Germany was among the top European buy-out funds launched in 2003, with a net return exceed-ing 30 %.

Interest in Halder and midcap MBOs was now piqued for good. The next fund’s capital of € 325 million was raised in just a few months, as the majority of investors had already participated in earlier investment programmes. Halder’s partners established their own management company in Frankfurt for this fund. Its investment stage is almost completed and divestments are being pursued.

Solid resultsReturns from earlier investment programmes consistently exceeded the average for funds launched in the same vin-tage year, and over the past ten years, they were among the top 25 % of that group. An average IRR of 25.4 % per year (gross) was realised from 30 exits completed to date.

All Halder investments; as of 30.06.2016

Focus on manufacturers driven by exports

Consumer Related

4%

Luxury Goods 3%Automotive 11%

Industrial Products

19 %

Trade 1%

Food 5 %Beverage Services 4 %

Construction 25 %

Medical 13%

Other Services 6%

Manufacturing 9%

Mathias Fackelmeyer joins Halder from DZ Bank and is appointed Managing Director in 2015.

17

Putting value-adding strategies to work

18

Sometimes it starts with China. When Halder acquired CCN in Thyez (France) in 2011, the MBO opened a suc-cession path for the founder, who had launched the com-pany in 1986 with a partner. In its first 25 years, CCN had become an important supplier of turbocharger parts to companies like BorgWarner and Honeywell which pro-vide ready-to-mount systems to carmakers.

The turbo gapThe MBO meant a change in direction for the company. The automotive industry serves demand from key markets – Europe, the US and China – with local production. CCN

already had manufacturing plants in France and Slovakia, and customers in North America were supplied from Mex-icali, a city on the border between Mexico and the US. But there was no factory in Asia – should it be located in India or China? The founder was looking for a partner with in-ternational experience to help with the decision.

Some Halder portfolio companies had already entered foreign markets by setting up distribution operations and building factories: Geka, a cosmetics packaging manu-facturer, needed a manufacturing presence in the US and established a new factory near Chicago in 2008 where pro-

Mittelstand goes global

Major crisisThe collapse of the US mortgage market precipitates a global financial and economic crisis. It disrupts the boom experienced by private equity companies in Germany since overcoming the setbacks from the beginning of the decade: huge amounts of available capital – funds under management grow to € 35 billion in 2008 – and an increasing number of market players face a supply of investment opportunities which has ceased to grow, driving valuations to new records. Given the surplus capital of many investors, valuation levels remain high, and with little room for debt financing, the flow of transactions runs dry. Halder weathers the storm with the smallest portfolio since the mid-1990s.

19

2009

Growth and a changing Advisory BoardThe investment period for Halder’s second German country fund (€ 325 million in capital) begins. In 2009 and 2010, six members retire from the Advisory Board, some of them continue to work with Halder as senior advisors or on the Super- visory Board. Professional experience of the next generation of board members again covers a broad range of industries.

duction commenced in 2009. Halder sent Senior Adviser Justus Leyde who, for a year and a half, spent two weeks per month on site supporting the project.

In China, Halder backed VAG, a manufacturer of large valves and fittings for water utilities. On the country’s east coast, urbanisation and industrialisation depended on large-scale infrastructure projects to serve the new metro-politan areas. This posed some challenges: the largest water pipes were four metres in diameter and required fittings on the same scale. Until then, VAG had only manufactured smaller flange valves – used to open or close pipelines – in China. Large scale valves and fittings needed to be devel-oped first and a new factory was required to produce them.

Backed by its shareholder Halder and supported by Dieter Mertens – an Asia expert advising Halder – VAG pushed on: from 2008 to 2009, some € 12.5 million were invested in a new factory and at the time of the exit in 2011, prepa-ration for the next expansion stage had been completed. It started operations in 2012 after a further investment of € 9 million. In addition, VAG began producing valves and fittings in Hyderabad (India) after investing another € 2.5 million in 2008.


More capital expenditureGeka, a cosmetics packaging manufacturer, invests $2 million to build a new factory near Chicago. Beginning in 2009, the company supplies US cosmetics manufacturers directly and taps the potential offered by the North and South American markets.

Who can do it?Since 2008, Halder’s portfolio companies have established 19 distribution companies and five factories abroad – a key contribution to market success: 65 % of the approximate-ly € 450 million in revenue generated by the companies of Halder-GIMV Germany II in 2015 were attributable to international business. By comparison, exports accounted for approximately 40 % of German GDP in 2015.

CCN’s founder and Halder decided to locate their Asian facility in China after reviewing the options available: de-mand for turbochargers is growing fast as the number of commercial and passenger vehicles rises. Tighter emissions and consumption regulation adds even more to demand; as a result, suppliers need more capacity. China is one of the world’s largest vehicle markets; therefore, local pres-ence is a must for automotive suppliers. And they need to

Hot and cold Compressor wheels manufactured by PRAE-TURBO take in cool ambient air to compress and funnel it to the engine’s combustion chambers. CCN makes the turbine powered by hot engine exhaust gas which drives the inlet’s compressor.

20

They want us here How to set up a new factory abroad? Our manufacturing operations are flexible – we need a decent hall to set up machinery and a stable source of electricity. The smallest production cell consists of a CNC mill, two lathes and a balancing station, tooled and fed by robots. This cell will work almost anywhere. What does “almost anywhere” mean? We have a rule: business before investment. Our clients work on a global scale, so we accommodate their needs and follow the re-sulting order volume – this gives us a baseline capacity utilisation for new locations, wherever they may be.Is there much difference between locations? Mexico has a good education system and English is widely spoken. In China, cultural differences are large from a European point of view. English is less broadly used, but there is an extremely strong work ethic.

When will you go to China? First, manufacturing operations in Mex-ico will be expanded because key customers absolutely want us there. They now see us as their “own” sup-plier because we have been using CCN’s location in Mexicali for pro-duction since spring 2016. Negoti-ations are underway in China, our machines are already there and our Chinese work force has been trained. Are there other synergies? We have an edge in automa-tion and we are transferring know-how – CCN will use the same robots as we do. But going forward, it will be more important to show one face to the market – Booster Preci-sion Components.

systems are ready for mass production, “the turbo” provides a very good way to meet stricter regulation. This is particu-larly true for China, where only 20 % of vehicles have turbo-chargers (Europe: over 60 %).

In 2012, CCN received permission by Chinese authorities to set up a 2,400 m2 factory. After investing € 3 million, suc-cessful test runs and customer approval, operations started in summer 2013.

accommodate the industry’s supply chain – manufacture close to customers, deliver just-in-time and invoice in local currency.

Environmental safety is a growth driverTurbochargers can boost engine performance, but they can also be used to reduce engine size and the number of cylin-ders, thus bringing down fuel consumption: potential fuel savings are 15–30 % for the same output. Until other drive

Halder‘s 20-year return on investment in Germany reaches 18.92% (net) in 2009, compared to a benchmark return of 11.4% (net) for European SME buy-outs. In 2010, the Frankfurt team increases its long-term return to 19.22% (net). Source: EVCA, Thomson Reuters, Halder

%

15

0

5

10

Horizon IRR over 20 years

SME buy-outs1

Halder2All private equity funds1

1 Horizon IRR prior to 31 December 2009, for European private equity funds (vintage years 1980-1990)2 Halder investments in Germany

Oliver Romano is COO of Booster Precision Components.

21

2010

CCN + PRAE-TURBO = Booster Precision ComponentsThe factory network’s potential is evident today. In spring 2015, Halder acquired PRAE-TURBO, a German manu-facturer of compressor wheels for turbochargers. The old and the new turbo specialists form a highly complemen-tary combination as they offer key components from a sin-gle source. With this in mind, the firms were folded into a group called Booster Precision Components in early 2016.

Within the group, PRAE-TURBO can take a quantum leap: its only factory in Schwanewede, near Bremen, was significantly expanded in 2014/2015 to increase volume from 5 million to 12 million compressor wheels per year. However, rapid market growth meant this was only a tem-porary solution.

Internationalisation creates a competitive edgeFrom a client’s perspective, critical components manufac-tured by a provider at a single location are considered a risk. Spreading production to markets abroad reduces this risk considerably. On top of this are requirements for local content – common in the US – which can be met with local operations.

Delivery time, transportation cost, import and export du-ties or exchange rate risk – issues CCN had addressed by spreading production geographically would have remained unresolved had PRAE-TURBO limited its manufacturing to the Schwanewede location.

For all these reasons, Booster’s subsidiaries now make joint use of the manufacturing network: a growing number of compressor wheels for commercial vehicles has been man-ufactured in Mexicali since early 2016 and components for passenger vehicles will follow. In Slovakia, CCN and Halder have transferred manufacturing to a new 10,000 m2 factory in Belusa which started operations in 2015. Chi-na is next on the list (see interview with Oliver Romano). Booster’s internationalisation pays off: sales are expected to grow annually by double-digit figures over the next sev-eral years.

Private equity enters the financing mainstreamAfter two decades, private equity has finally “arrived” on the German market: more than 200 investment firms manage nearly € 40 billion in capital. They support some 1,300 German companies employing 1.2 million people and generating more than € 200 billion in sales.


22

2011

Systematic value creationOnce the private equity market returns to normal after the financial and economic crisis, Halder begins to standardise and refine its approaches to value creation: in addition to international growth, concepts include changes in corporate strategy, increased capital expenditure and add-on acquisi-tions to drive value enhancement. In many cases, a combination offers the best prospects.

Back to normalBy 2010, the German economy has survived the recession and launches a spectacular ex-port-fuelled recovery. This is good news for Halder’s portfolio companies, who see their EBITDA exceed pre-crisis levels. The value of the portfolio is recovering fast.

With this idea in mind, Halder entered the German buy-out market in 1991. It has remained a cornerstone of the firm’s investment process: Halder provides midcap firms with capital for investment if they can demonstrate past success and future viability of their business models. From 2011–2015, the portfolio companies of Halder-GIMV Ger-many II spent some € 140 million on plant and equipment, thus creating a foundation for rising sales and profits.

Examples include Booster Precision Components (turbo-charger components) and VAG (a manufacturer of large valves and fittings for water utilities held by Halder-GIMV Germany). Both firms’ international expansion was driven by investment programmes of € 45 million and € 38 mil-lion, respectively, adding to manufacturing operations.

A business model based on capital expenditureWback operates in the food industry. Like most other in-vestments by Halder, the acquisition offered ownership succession to the founder: the Wendeln family has been in the bakery business for over 100 years and began industrial- scale production by starting a baking plant in 1919. The company became one of Europe’s largest industrial bak-ers with well-established national brands “Lieken Urkorn” and “Golden Toast” in Germany. Peter Wendeln, who es-tablished Wback with two partners in 2004, represents the family’s active generation.

Wback’s business model is based on top-quality hamburg-er and hot dog buns produced in bulk using state-of-the-art technology. Key clients include fast food restaurants, food retailers and the food service industry. Implementing the model requires major capital investment.

Wback’s initial baking plant was a greenfield project in Bönen (North Rhine-Westphalia) and commenced oper-ations in 2005 after an investment of € 25 million. Three years later, a second bakery was built in Leipheim, Bavaria, from the same blueprint. Modern baking plants are high-tech facilities, extensively automated and can run 24/7: depending on the product mix and adjusting for mainten- ance-related downtime, each location initially had a pro-duction capacity of 290 million buns a year.

Success factor serviceThe bakeries’ location keeps transportation routes and de-livery times short, as a result, logistics cost remains low. Bönen covers Northern Germany and neighbouring coun-tries, while production from Leipheim goes to the coun-try’s southern part, Austria, Switzerland and Italy. This is important for fast food restaurants as they have their goods picked up at Wback’s facilities three times a week. Buns are transferred to the clients’ regional storage facilities and taken to restaurants on the next day. Most food retailers order buns with a longer sell-by date in packages of four or

Capital for capacity


* Relative to investment cost during and afterthefinancialcrisis

Strong increase in portfolio value

0.2

0.4

0.6

0.8

1.0

0.58x

Q4 2010Q2 2009

1.12x

23

Investment and internationalisationVAG, a supplier of large valves and fittings for water utilities, launches a € 38 million investment programme to expand its international manufacturing capability; a portion of € 15 million is invested in Asia. In China, the company creates a low-cost manufacturing base and benefits from the country’s growing infrastructure investment. Exporting from China is a distinct possibility over the long term.

six with their own branding; shop delivery is twice a week. Despite the difference, Wback actually serves both groups “just-in-time” – there is an interim storage facility feeding shipper’s lorries, but the company does not hold inventory.Revenue growth to € 36.5 million in 2012 was also support-ed by Wback’s sales strategy: early on, the firm negotiated partnerships with major clients. The company started as a supplier for Burger King outlets in Northern Germany and the Netherlands, with coverage of restaurants in Southern Germany, Austria, Switzerland and Italy added later. Part-nering with Burger King results in good baseline utilisa-tion of capacity, but success does not rest on the ability to deliver a product. Top quality and reliability count just as much – on this level, baking buns means providing a ser-vice.

Bönen IIIn 2013, Wback’s founders decided to join forces with Halder for further expansion. The market leaders in the restaurant sector were generating solid like-for-like growth and Burger King was planning to add a significant number of outlets in Germany and other European countries. In addition, the trend towards snacks, convenience food and a rising popularity of hamburgers in private households also meant greater demand from retailers. Given this out-look, Wback set a medium-term objective to double 2012’s revenues.

There is no incremental addition to industrial-scale baker-ies: to avoid future bottlenecks, a second baking line had to

be added to the Bönen site, essentially doubling capacity. At about € 15 million, capital spending was below the cost of a new plant since the expansion project shared premises and infrastructure with existing operations. The new line was started in spring 2014.

Feeding the system2014 did not unfold according to plan: it was a weak year for the fast food industry in Germany and the expected increase in orders was not realised until two years later. But large-scale production works best with high and con-tinuous capacity utilisation – ideally from large orders. To

Take a bite… hot dogs and hamburgers are popular with consumers. Wback, Germany’s largest baker of hamburger and hot dog buns, sold more than 600 million units to restaurants, retailers and other vendors in 2016. This equals more than 1.5 million buns consumed per day.

24

2013

More capital expenditureWback produces hamburger buns on an industrial scale at two German locations to supply customers in Western Europe. Future growth requires more capital expenditure for the expansion of its production and logistics capabilities.

Investment and internationalisationCCN, a manufacturer of precision components for turbochargers, is also heading to China to close a gap in its manufacturing network serving the global automotive industry. Investments of € 35 million are planned to broaden the manufacturing footprint in 2011–2015.

maintain a comfortable level, Wback booked additional orders by broadening contacts in the retail and the food service sectors in Germany and Scandinavia. Further vol-ume came from fast food restaurants in Italy and France.Due to different requirements regarding shelf life, packaging and procurement cycles, more business from a more diverse client base meant Wback needed to set up addition-al packaging equipment and expand its internal storage facilities. A further € 6 million were invested to adapt in-frastructure in spring 2016. Now, the Bönen bakery is suf-ficiently flexible to maintain operational efficiency when demand shifts between customer segments.

Eyes on the prizeIndustry logic determines the next step. Adding current capacity of the Bönen and Leipheim sites at good rates of utilisation gives a potential output of 740 million buns per year. Wback is almost there: some 700 million buns were produced in 2016, demand continues to rise and the targets set when Halder came aboard are close – further capacity expansion seems just around the corner.

Stay flexible What is your market outlook? The trends towards eating out, snacks and convenience food are continuing, and hamburger and hot dog consumption is rising. In 2015, we sold an additional 100 million buns, 665 million in total.How do you cope with rising de-mand? We started a new baking line in 2014, doubling capacity in Bönen. In 2014/2015, new orders were booked mainly from food retailers, and then we expanded our packaging and stor-age facilities to meet the needs of our broader customer base.What do you expect for the coming years? We expect current trends to continue: Burger King has like-for-like growth and is on a march worldwide. The dip in growth from previous years seen in Germany is likely to be offset in 2016 and we finally expect the opening of new outlets.Any expansion projects on the horizon? Currently, no major expansion is planned for Bönen or Leipheim. We have some reserves thanks to our flexible infrastructure. Ideally, baking lines would be set for a constant volume, product and customer mix. But the reality is different because demand from food retailers is higher in spring/summer than in autumn/winter. Add parallel sales pro-motions by several retail chains and rising consumption in fast food restaurants to that and we are busy for months on end! But what’s new? It was the same story when we had just one bakery in Bönen.


Matthias Geißler is Managing Director of Wback.

Christian MuschalikInvestment Manager

25

Major changes in strategy are not among the issues Halder usually discusses first with a new portfolio com-pany’s management. Nevertheless, best practices applied to portfolio companies will include strategy reviews, which may then trigger change.

But why should a company generating some € 23 million in revenues after 30 years in business, a contract manufactur-er of precision components for more than 150 customers, focus on a single market? And why should it tell everybody by changing its name and branding?

Focus on medical technology“Because that was exactly the right decision”, says Ralf Pe-trawitz, Managing Director at KLINGEL medical metal, who participated in Halder’s MBO of the company in 2012.

“The founder had long since departed. We were no longer a contract manufacturer. And a substantial share of revenues came from medical technology firms, which are now the focus of the business.”

In the end, the change in strategy only revealed what was already there: the new name “KLINGEL medical metal” refers to deep knowledge in processing difficult-to-ma-chine materials such as stainless steel and titanium, a track record of meeting with complex client requirements and comprehensive service. Klingel was also well connected to the medical technology sector, supplying e. g. implants and abutments to one of the leaders in the dental market. When Halder completed the MBO in 2012, medtech clients con-tributed more than 50 % to Klingel’s revenues.

Focus on medical technology

Halder becomes a member of the UNPRI, a United Nations initiative for responsible investment (www.unpri.org), and publishes its first report according to the organisation’s guidelines in 2013/2014.

After being part of Gimv Group for more than a decade – where the Frankfurt-based team continued to work under the name “Halder”, managing its own fund – the German partners strike out on their own through an MBO.

26

Diversify and go (further) abroadAmoena is a global leader in manufacturing high-quality silicone breast forms and functional apparel for women recovering from surgery; its production facilities are located in Germany and Costa Rica. The company continues to expand its market po-sition: sports- and leisurewear are added to the product range, and additional markets are being developed in Asia.

2014


Then, a new chapter began for the company: it was to turn away from a contract manufacturer’s mindset seeking safe-ty by spreading its business over a broad range of clients. And it would focus its expertise on an attractive growth market: medical technology is a large industry and cov-ers a product range broad enough to provide a sustainable growth path to companies of Klingel’s size.

Fragmentation of the supply side was also pointing to-wards a change of strategy: while some 1,000 mainly small-

er companies manufacture and assemble medical devices in Germany, Petrawitz expects more market consolidation triggered by regulation as many smaller firms cannot sat-isfy requirements and obtain mandatory certification: “At some point, probably every machine and process will have to comply with certain norms. Ideally, you do this by in-stalling end-to-end quality management and high stan- dards. But business needs a certain size to make this happen.”

Before and after The company known as “KLINGEL medical metal” today was founded by Helmut Klingel in 1986. Working with a staff of two, he processed orders for CNC-milled components from firms in the Pforzheim region. 20 years later, the com-pany had more than 100 customers and its business volume had grown to double-digit millions.

After Halder’s MBO and focusing its strategy on medical technology, Klingel now has 310 employees, more than 170 CNC machines and some € 30 million in revenues. It is also a full-service provider to medical technology companies, which account for more than two-thirds of business by now. Services cover engineering and manufacturing of pro-totypes, in-house CNC processing, heat and surface treat-ment, cleaning, assembly, sterilisation and logistics.

Klingel typically manufactures small and medium-sized lots, but serial production may go to hundreds of thousands of units. Component geometry can be complex, with dimen-sions ranging from 1 mm for pacemakers or jawbone screws to significantly larger parts used in operating tables.

Klingel processes materials such as aluminium, super alloy stainless steel and titanium. With an in-depth understand-ing of their properties, the company also manufactures com-posites by laser welding different materials.

Medical technology clients usually provide packaged solu-tions to equip doctor’s surgeries, laboratories, hospitals and other medical facilities. Core applications include implants (dental, pacemakers, trauma and spinal), dialysis machines, endoscopic equipment, tools, surgical robots and operating tables.

Anja Böhme Investment Manager

27

Safety and qualityKlingel has held these certifications, particularly DIN EN ISO 13485 for manufacturers of medical technology prod-ucts, since 2006. They were renewed in 2015. Certification has both internal and external effects: to satisfy regulatory requirements, the company has established a comprehen-sive quality management system, which will integrate any additional step in its workflow as well as new machinery – no room is left for gaps.

In 2016, equipment for electropolishing was added. Placed near the end of the manufacturing chain, it enhances value creation and achieves a critical product finish: in an elec-trochemical process, metal surfaces are smoothed at the micro- and nano-scale level, making it more difficult for germs to take hold. Applications include components for medical endoscopes and surgical tools, which also look better after polishing. Thus, electropolishing also creates a technical aesthetic helping to set the company apart from the competition.

A long-distance runBecoming a partner for medical technology companies is not an easy transformation. To some extent, this is a result of market trends: when clients are taken over and their procurement policies change due to the new parents’ guidelines favouring internal sourcing, business may be lost. The only way to offset this is continuous development of new business and with this in mind, Klingel has been strengthening its key account management for the med-

tech sector since 2015. In practice, however, this often clashes with client demands for exclusivity – it is difficult to work for more than one well-known firm in the same sector at the same time. Petrawitz: “Often enough, there is more emotion behind it than factors related to competi-tion. So, building new business can take time and you have to work your way up.”

To get more traction, Klingel has been looking for poten-tial acquisitions ever since strategy was changed. In early 2016, it took over 90-year-old Josef Ganter Feinmechanik, a family-owned company and Germany’s market leader in dental ratchets. Ganter’s business is highly complementary to Klingel’s activities and together, the companies have a higher share of implant makers’ purchasing volume. There is also potential for cross-selling and more direct exports.

Looking back on developments after changing its strate-gic direction, the company draws a positive conclusion. As revenues have surpassed € 30 million, Klingel has become one of the larger suppliers in Europe and the outlook is good: “We are meeting a high degree of market accept-ance, business from existing and new clients in medical technology is rising, and there is more to come over the next years,” says Petrawitz.

Wolfgang Deml is the new Chairman of the Advisory Board. He introduces changes to the structure of portfo-lio companies’ supervisory boards: appointees no longer serve on Halder’s Advisory Board at the same time.

Buy & buildAqua Vital is one of Germany’s leading providers of water dispensers. The acquisition of competitor Revos strengthens market position and growth dynamics.

28

Change of strategyHelmut Klingel GmbH CNC-Zerspanung becomes KLINGEL medical metal. The company gears its strategy towards medical technology and completes an add-on acquisition in the sector, increasing med-tech‘s share of sales to 70%. It is the fourth add-on for Halder-GIMV Germany II – after Hytec for Keymile, Revos for Aqua Vital and PRAE-TURBO for CCN.

2015


Market leadership was not a top priori-ty to Aqua Vital in Neuss. The company, founded in 1999, provides bottled water coolers and point-of-use dispensers, plus follow-up service, to commercial clients.

Thanks to a successful telemarketing con-cept, the company had already established a good market position before Halder be-came its major shareholder in 2013. Then, Aqua Vital took pole position: after acquir-ing Revos – compared to Aqua Vital’s € 20 million, a much smaller but substantial competitor with about € 6 million in sales – the group has become the market leader in Germany for bottled water coolers.

Tangible benefits“Market leadership in and of itself means very little,” says Jürgen Linde, Managing Director of Aqua Vital. The market is con-solidating: in 2014, Nestlé Waters Direct – the former No. 1 in Germany – was sold to Eden Springs Group in Switzerland, which has a presence throughout Europe. In 2016, Eden Springs became part of Cott Corporation in the US. In this environ-

ment, Revos was one of the few larger inde-pendent market players in Germany. When it became available, this was an opportunity Aqua Vital and Halder did not want to miss.

The acquisition improved Aqua Vital’s mar-ket position and had tangible results as well: in 2015, the first full year of the expanded group – which also includes point-of-use specialist aQto, dispenser manufacturer aQora as well as subsidiaries in Austria and Hungary – sales surpassed € 30 million. This was a 14 % increase on the previous year’s level, with a strong contribution by Revos and solid margins.

Integration, done rightIntegrating Revos obviously worked, but took some time and effort. Linde: “Revos uses external partners to market its product, supported by regional sales and service cen-tres. In contrast, Aqua Vital is a pure direct sales and telemarketing organisation. Both firms worked the market next to each other for years, never crossing paths on the client side.” This remains unchanged – market ap-proaches are kept separate, using different

Abigfishinasmallpond

Private Equity International, the industry magazine, names Halder “Private Equity Firm of the Year 2013” in Germany.

29

2016

Acquisition, investment and internationalisationAfter VAG and CCN, PRAE-TURBO establishes manufacturing operations in China. Halder combines CCN und PRAE-TURBO to form Booster Precision Components. Within the group, PRAE-TURBO expands its formerly German production base to North America and Asia using CCN‘s network.

sales and distribution concepts. The firms complement each other, but they do not compete.

Where it made sense, central functions were merged, such as human resources and IT. Other systems like accounting and customer relationship management were transferred to a common platform. Aqua Vital and Revos share service centres and have further expanded their service network since the acquisition. There are some economies of scale in procurement as well, e. g. in purchasing bottled water.

There is more still: while both companies market bottled water coolers (BWC) and POU-dispensers (POU), equip-ment is sourced from different vendors. Having built POU systems in the past, aQora is now developing dispensers using common technology but different branding, which Revos will sell as well. As a result, production volume may increase enough longer term to make outsourcing some manufacturing to the Hungarian subsidiary a viable prop-osition. Going forward, a separate product line for Hun-gary or Eastern European markets might become feasible.

External or internal growth?Often, this is not the most important question – either can contribute to a company’s development and value. Usually, Halder’s portfolio companies are already in such a strong position or are so highly specialised that tapping interna-tional markets by expanding production and sales opera-tions is the best path to future growth.

Some cases are different: in 1998, Halder acquired Es-sanelle, Germany’s largest chain of hairdressers. Essanelle had planned to grow by consolidating the market and at the time of its IPO, the number of outlets had grown from 373 to 535 – mission accomplished. Add-on acquisitions are typical for Halder: Wichard, a French manufacturer of precision forgings, used acquisitions to enter the leisure market, and hotel amenities supplier ADA took over a com-pany to expand its supply chain in Asia.

With the Halder-GIMV Germany II fund, Halder has be-come more active: Aqua Vital (water dispensers), Keymile (data transmission technology) and KLINGEL medical met-al (components for medical technology) have used acquisi-tions to boost growth.

For Prüm-Garant (Halder-GIMV Germany) and Booster Precision Components (Halder-GIMV Germany II), acqui-sitions were even more important. Both came into being by merging firms of comparable size and complementary prod-uct range, with a much stronger market position as a result: Prüm and Garant individually were not among the top 5 in Germany’s market for interior doors, but post-merger, Prüm-Garant was Germany’s second-largest door manufac-turer. Booster became one of Europe’s largest independent providers of components for exhaust turbochargers.

Philipp ScheierInvestment Manager

30

Content of this brochure was compiled with utmost diligence. However, Halder Beteiligungsberatung cannot guarantee completeness or accuracy. Halder may not be held liable for any consequences arising from the use of this brochure or its contents.

The information contained herein as well as text, design, illustration and pho-tography are protected under copyright law. The contents of this publication may not be reproduced, copied or disseminated in print or electronic format without prior written consent except for personal use.

A brochure by Halder Beteiligungsberatung GmbH, Bockenheimer Landstraße 98–100, 60323 Frankfurt am Main, Tel. (069) 24 25 33 0, www.halder.eu, [email protected] Managing Director: Mathias Fackelmeyer Registered: Amtsgericht Frankfurt am Main, HRB 33 799

Design: DekantDesignbüro, Wiesbaden. Text: Wedel & Beiertz GmbH, Frankfurt am Main. Copyright: DekantDesignbüro, Halder Beteiligungsber-atung GmbH, Wedel & Beiertz GmbH. Illustration: Blum Designbüro, Wies-baden. Photography: Dekant Designbüro, Aqua Vital, Bottega Manifatturiera Borse, CCN, Keymile, KLINGEL medical metal, PRAE-TURBO, Wback

These initiatives are aimed at the POU segment, which shows the highest potential. Over the past years, it has grown at an annual rate of 10 % in Germany and there are now more than 130,000 dispensers installed in the field. The trend is expected to continue, in part due to the high quality of tap water in Germany. Annual growth is around 2 % in the more mature BWC segment, which also has an installed basis of 130,000 units.

IT as a success factorPutting both firms on the same IT platform to manage sales was critical to the successful integration of the ac-quired company. “Aqua Vital’s CRM system is tailored to its sales and distribution strategy. It has all conceiva-ble business transactions covered down to the fine detail and allows for real-time management of sales operations,” Linde says. Creating the interfaces to connect Revos to the system was the integration step that took the most effort.

By now, the new CRM tools are working for Revos, as ev-idenced by the group’s financial data. Linde: “Compared to 2014, Revos had grown by 30 % as of mid-2016”. This was also due to more unified business practices: Aqua Vital has long been renting out the larger part of its dispensers. Before the Revos acquisition, revenues from rent contracts accounted for half of sales and the company had a good grip on forecasting revenue trends. In contrast, Revos was originally more focussed on after-sales service. Linde adds: “Now, Revos is broadening its rental base.” It shows: following a temporary decline of rental income’s share of

group sales, that percentage is rising again. Overall, Linde also views the integration as a success because activities in the market were not affected. And: “We did not lose any staff and today the group employs more people in all parts of the business than before the acquisition”.

Next stepsLinde does not consider further acquisitions like Revos highly likely as there are hardly any attractive candidates available on the domestic market. The international out-look is different. There, he sees acquisitions as a spring-board for market entry. This might apply to new business initiatives as well, e. g. a coffee service for offices, but: “We have been looking to acquire a coffee provider for years, but we never came close to serious negotiation”, Linde re-members. Do it yourself, then: after diligent preparation, “LariQo”, the Italian-style coffee service of Aqua Vital’s subsidiary aQto, was launched in late 2016.


Ownership Succession and Growth for MidCaps

ownership succession and growth for midcaps since 1991€¦ · ownership succession and growth for...

Documents